Banco BMG Bonds Rally on Takeover Speculation: Sao Paulo Mover

June 28 (Bloomberg) -- Banco BMG SA dollar bonds rallied to
a three-month high after a news report that Banco Bradesco SA
plans to buy the payroll lender.

Banco BMG’s dollar bonds due in 2018 rose 7 cents to 90
cents on the dollar at 5:29 p.m. in Sao Paulo, after earlier
touching 93 cents, the highest since March 14, according to
Trace, the bond price-reporting system of the Financial Industry
Regulatory Authority. The yield dropped 184 basis points, or
1.84 percentage point, to 10.33 percent.

O Estado de S.Paulo columnist Sonia Racy reported today on
the newspaper’s website that Bradesco is buying BMG, without
saying where she obtained the information.

“Right now the bond price is very low for what it should
be if Bradesco makes the acquisition,” Luiz Campos, a partner
at Dinosaur Securities LLC, said by phone from Sao Paulo. “BMG
bonds will converge toward the yields of Bradesco.”

Clive Botelho, BMG’s chief financial officer, said the bank
doesn’t comment on rumors. A press official for Bradesco in Sao
Paulo, who asked not to be identified in accordance with company
policy, declined to comment.

Banco BMG’s borrowing costs surged to a record this month
after Brazil’s central bank took control of smaller peer Banco
Cruzeiro do Sul SA, citing “serious” financial violations at
the bank. The takeover of Cruzeiro intensified investor concern
that limited access to long-term funding and increasing
competition from larger rivals will erode profitability for the
industry.

Funding Pressure

“The funding profile of these banks in the payroll segment
has been under pressure even before what happened with
Cruzeiro,” Cynthia Cohenfreue, an analyst with Standard &
Poor’s, said from Buenos Aires. “This adds to the pressure.”

Regulators seized Cruzeiro do Sul 17 months after the
bailout of midsize lender Banco Panamericano SA amid a fraud
investigation of the bank.

Payroll loans are similar to payday loans in the U.S.,
except the Brazilian government allows banks to deduct the
payments directly from payroll and pension payments before
consumers ever see their checks.